UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13606
SOLA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3189941
(State or other jurisdiction of
(I.R.S. employer identification no.)
incorporation or organization)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices)
(zip code)
(415) 324-6868
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
As of July 30, 1996, 21,809,528 shares of the registrant's common
stock, par value $0.01 per share, which is the only class of common
stock of the registrant, were outstanding.
SOLA INTERNATIONAL INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended June 30, 1996
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PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of June 30, 1996 3
Consolidated Condensed Balance Sheet as of March 31, 1996
(derived from audited financial statements) 3
Consolidated Condensed Statements of Income for the three month
periods ended June 30, 1996 and June 30, 1995 4
Consolidated Condensed Statements of Cash Flows for the three
month periods ended June 30, 1996 and June 30, 1995 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SOLA INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(in thousands)
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March 31, 1996
(derived from
June 30, 1996 audited financial
ASSETS (unaudited) statements)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 27,097 $ 22,394
Trade accounts receivable, net 95,183 74,845
Inventories 133,522 100,707
Deferred income taxes 7,491 7,491
Prepaids and other current assets 6,086 1,861
------- -------
Total current assets 269,379 207,298
Property, plant and equipment, net 90,385 79,582
Deferred income taxes 10,125 6,800
Debt issuance costs 2,588 1,907
Goodwill and other intangibles, net 184,577 120,352
Other assets 1,045 910
-------- --------
Total assets $558,099 $416,849
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks and current portion of
long-term and bank debt $ 24,303 $ 17,403
Accounts payable, accrued liabilities and 95,973 82,142
payroll
Accrued reorganization and acquisition 13,032 9,746
expenses
Income taxes payable 2,180 1,090
Deferred income taxes 1,790 461
------- -------
Total current liabilities 137,278 110,842
Long-term debt, less current portion 5,110 3,360
Bank debt, less current portion 114,750 6,000
Senior subordinated notes 89,188 88,530
Deferred income taxes 6,001 4,990
Other liabilities 11,232 10,886
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Total liabilities 363,559 224,608
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Contingencies
Shareholders' Equity:
Preferred stock, $0.01 par value; 5,000
shares authorized; _ _
no shares issued
Common stock, $0.01 par value; 50,000 shares
authorized;
21,809 shares (21,797 shares as of March 31, 218 218
1996)
issued and outstanding
Additional paid-in capital 206,480 206,412
Equity participation loans (320) (421)
Accumulated deficit (15,833) (17,993)
Cumulative foreign currency adjustment 3,995 4,025
------- -------
Total shareholders' equity 194,540 192,241
------- -------
Total liabilities and shareholders' equity $558,099 $416,849
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The accompanying notes are an integral part of these condensed
financial statements
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<PAGE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
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Three Months Three Months Ended
Ended June 30, June 30, 1995
1996
<S> <C> <C>
Net sales $109,536 $95,922
Cost of sales 58,049 50,182
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Gross profit 51,487 45,740
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Research and development expenses 4,207 3,390
Selling and marketing expenses 19,275 16,598
General and administrative expenses 12,423 12,084
In-process research and development expense 9,500 _
------- -------
Operating expenses 45,405 32,072
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Operating income 6,082 13,668
Interest expense, net (3,250) (3,077)
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Income before provision for income taxes,
minority interest and extraordinary item 2,832 10,591
Provision for income taxes (578) (2,965)
Minority interest (92) (271)
------- -------
Income before extraordinary item 2,162 7,355
Extraordinary item, loss due to repurchase of
senior subordinated notes, net of tax _ (912)
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Net income $2,162 $6,443
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Earnings (loss) per share:
Income before extraordinary item $0.09 $0.32
Extraordinary item _ (0.04)
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Net income $0.09 $0.28
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Weighted average number of shares outstanding 23,159 22,866
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The accompanying notes are an integral part of these condensed
financial statements
</TABLE>
<PAGE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
[CAPTION]
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Three Months Three Months Ended
Ended June 30, June 30, 1995
1996
<S> <C> <C>
Net cash provided by (used in) operating
activities $ (2,025) $ 4,140
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Cash flows from investing activities:
Acquisition of worldwide ophthalmic business
of American Optical Corporation,
less cash and cash equivalents of $3,186 (107,512) _
Acquisition expenses payable 3,183 _
Capital expenditures (2,791) (3,955)
Proceeds from sale of fixed assets 21 45
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Net cash used in investing activities (107,099) (3,910)
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Cash flows from financing activities:
Payments on equity participation loans 169 387
Net receipts under notes payable to banks,
and long term debt 1,785 345
Borrowings on long term debt 515 258
Payments on long term debt (653) _
Proceeds from bank debt 112,500 15,000
Repurchase of senior subordinated notes _ (17,766)
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Net cash provided by (used in) financing
activities 114,316 (1,776)
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Effect of exchange rate changes on cash and
cash equivalents (489) 62
------- -------
Net increase (decrease) in cash and cash
equivalents 4,703 (1,484)
Cash and cash equivalents at beginning of
period 22,394 16,148
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Cash and cash equivalents at end of period $27,097 $14,664
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The accompanying notes are an integral part of these condensed
financial statements
</TABLE>
<PAGE>
SOLA INTERNATIONAL INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
1. Basis of Presentation
On June 19, 1996, the Company acquired substantially all of the
worldwide ophthalmic business ("AO") of American Optical Corporation
("AOC") pursuant to the terms of the Purchase Agreement (the "Purchase
Agreement") dated as of May 6, 1996 between the Company and AOC. The
Company acquired AO for cash consideration of $107 million (together
with the assumption of certain liabilities), subject to post-closing
adjustments (the "AO Acquisition"). The AO Acquisition was funded
primarily through borrowings under the Company's New Credit Agreement
(see Note 4), which borrowings were subsequently repaid in part with
the proceeds of the Stock Offering during July 1996 (see Note 7).
The accompanying consolidated condensed financial statements of the
Company have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company's financial statements presented herein
include the results of operations and cash flows of the AO business
for the ten days ended June 30, 1996 subsequent to the AO Acquisition.
The consolidated condensed balance sheet as of March 31, 1996 was
derived from audited financial statements. The accompanying
consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto included in the Company's annual report on Form 10-K for
the fiscal year ended March 31, 1996.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the results for
the interim period. The results of operations for the three months
ended June 30, 1996 are not necessarily indicative of the results to
be expected for the full year.
The AO Acquisition has been accounted for under the purchase method
of accounting as of the closing date. Accordingly, the Company's
consolidated financial statements reflect the allocation of the
purchase price to the assets and liabilities of the AO business unit
based upon their respective estimated fair values. The current
allocation of the purchase price is preliminary, pending completion of
valuation studies and other determinations of fair value presently in
process, and, therefore, the allocation to inventories, property,
plant and equipment, in-process research and development and
reorganization provisions may change once such valuations are
finalized.
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The preliminary allocation of purchase price, subject to
finalization of valuation studies and other fair value determinations
and subject to the purchase price adjustment mechanism included in the
Purchase Agreement, has been calculated as follows:
(in thousands)
Purchase price $107,000
Estimated acquisition expenses 3,698
-------
Total estimated acquisition cost $110,698
-------
Estimated historical net assets at acquisition
date $ 31,750
Estimated write-up of inventories 7,215
Estimated write-up of property, plant and
equipment 302
Estimated goodwill and other intangible assets 63,367
Non-compete agreement 1,500
Estimated in-process research and development 9,500
Estimated relocation and exit costs (687)
Net deferred tax effects of certain of the above
purchase accounting adjustments ( 2,249)
-------
$110,698
-------
2. Inventories
June 30, 1996 March 31, 1996
(in thousands) (in thousands)
Raw Materials $ 11,999 $ 10,595
Work In Progress 5,537 4,782
Finished Goods 85,124 59,595
Molds 30,862 25,735
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$133,522 $100,707
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Molds comprise mainly finished goods for use by manufacturing
affiliates in the manufacture of spectacle lenses.
3. Contingencies
The Company is subject to environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface
waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials.
The Company is currently participating in a remediation program of
one of its manufacturing facilities under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and
the Superfund Amendments and Reauthorization Act of 1986. The Company
estimates that, based on an independent feasibility report prepared in
accordance with an EPA 1991 Consent Order, additional clean-up costs
of approximately $150,000 for the current fiscal year and $100,000 per
annum thereafter for up to 16 years may be incurred. Under the
current remediation program, the EPA has established that re-
evaluation of the program be performed every five years, with the next
scheduled review by the EPA being in the fiscal year ending March 31,
1998.
The Company is also involved in other investigations of
environmental contamination at several U.S. sites. Some clean-up
activities have been conducted and investigations are continuing to
determine future remedial requirements, if any.
Under the terms of the sale agreement with Pilkington plc
("Pilkington"), for the purchase of the Sola business in December 1993
("Acquisition"), Pilkington has indemnified the Company with regard to
expenditures subsequent to the Acquisition for certain environmental
matters relating to circumstances existing at or prior to the time of
the Acquisition. Under the terms of the indemnification, the Company
<PAGE>
is responsible for the first $1 million spent on such environmental
matters, Pilkington and the Company share equally the cost of any
further expenditures between $1 million and $5 million, and Pilkington
retains full liability for any expenditures in excess of $5 million.
As of June 30, 1996 and March 31, 1996, the Company has provided
for environmental remediation costs in the amount of $2.4 million, and
$2.5 million, respectively, which is included in the balance sheet
under other long-term liabilities.
In the ordinary course of business, various legal actions and
claims pending have been filed against the Company. While it is
reasonably possible that such contingencies may result in a cost
greater than that provided for in the financial statements, it is the
opinion of management that the ultimate liability, if any, with
respect to these matters, will not materially affect the consolidated
operations or financial position of the Company.
4. Bank Credit Agreement
Simultaneous with the closing of the AO Acquisition (see Note 1),
the Company entered into a new bank credit agreement with The Bank of
America National Trust and Savings Association, for itself and as
agent for a syndicate of other financial institutions, covering an
aggregate amount of $180 million (the "New Credit Agreement"),
replacing the Company's existing credit agreement. The New Credit
Agreement is divided into three tranches which comprise: a five-year
term loan of $30 million, a renewable three-year foreign currency
revolving facility of $30 million, and a five-year US dollar revolver
of $120 million. The term and revolving loan facilities were made in
order to finance a portion of the AO Acquisition and to refinance
existing facilities generally used for working capital. The foreign
currency revolver matures on May 31, 1999 and the term loan and US
dollar revolver both mature on May 31, 2001.
Borrowings under the term loan facilities and the US dollar
revolver (other than swing line loans, which may only be Base Rate
Loans) may be made as Base Rate Loans or LIBO Rate Loans. Base Rate
Loans bear interest at rates per annum equal to the higher of (a)
0.50% per annum above the latest Federal Funds Rate, or (b) the Bank
of America Reference Rate. Base Rate Loans include a margin varying
from 0% to .125% based on the Company's Funded Debt to EBITDA Ratio.
LIBO Rate Loans bear interest at a rate per annum equal to the sum of
the LIBO Rate and a margin varying from .500% to 1.125% based on the
Company's Funded Debt to EBITDA Ratio. Fixed rate borrowings under
the foreign currency revolver bear interest at rates per annum equal
to the referenced currency's local IBOR plus a margin varying from
.500% to 1.125% based on the Company's Funded Debt to EBITDA Ratio.
Borrowings under the foreign currency revolver are also available at
local Currency Base Rates at spreads similar to those for U.S. Base
Rate Loans. The term loan and U.S. dollar revolver currently bear
interest at an initial rate of LIBOR plus 0.75% (approximately 6.5% as
of June 30, 1996) and the foreign currency revolver bears an initial
interest rate of the relevant local economy IBOR plus 0.75%.
The US term loan amortizes in semiannual installments with total
annual principal repayments as follows:
Year Ended March 31
(in thousands)
1997 $1,875.0
1998 4,687.5
1999 5,625.0
2000 6,562.5
2001 7,500.0
2002 3,750.0
<PAGE>
Outstanding unpaid principal amounts on both the US dollar and
foreign currency revolver are due on their respective maturity dates.
Interest on all the above loans is payable at the end of the
interest period, or 90 days, whichever is shorter. Repayments of
principal on the above loans must be accompanied by a payment equal to
the accrued interest associated with the principal being repaid.
The New Credit Agreement contains a number of covenants, including,
among others, covenants restricting the Company and its subsidiaries
with respect to the incurrence of indebtedness (including contingent
obligations), the creation of liens, the making of certain investments
and loans, engaging in unrelated businesses, transactions with
affiliates, the consummation of certain transactions such as sales of
substantial assets, mergers or consolidations, margin stock purchases
and other transactions. Additionally, the New Credit Agreement
restricts significant accounting changes, negative pledges and
designated senior indebtedness. The New Credit Agreement also
restricts the ability of the Company and its subsidiaries to make
restricted payments in the nature of, among other things, (i)
declaring, making or paying dividends or other distributions in excess
of prescribed levels, (ii) purchasing, redeeming or retiring shares of
the Company's capital stock, and (iii) making certain payments,
purchases, redemptions, modifications or other acquisitions of any
Subordinated Notes. The Company and its subsidiaries are also
required to comply with certain financial tests and maintain certain
financial ratios. The New Credit Agreement includes standard events
of default.
5. Pro forma Data
The following pro forma data was prepared to illustrate the
estimated effect of the AO Acquisition and the financing related
thereto, as if the AO Acquisition had occurred as of the beginning of
each period presented:
Three Months Ended June 30
1996 1995
Net Sales $128,084 $117,598
Income before extraordinary item $8,235 $7,651
Net income $8,235 $6,739
Earnings per share:
Income before extraordinary item $0.36 $0.33
Net income $0.36 $0.29
These pro forma results of operations have been prepared for
comparison purposes only, and do not purport to be indicative of what
the results would have been had the AO Acquisition occurred at the
beginning of the period or the results which may occur in the future.
As a result of the AO Acquisition the Company has incurred two non-
recurring charges in the quarter ended June 30, 1996: (i) a $0.7
million charge to cost of sales for the amortization associated with
an inventory write-up to fair value; and (ii) a $9.5 million charge
for the write-off of in-process research and development. The total
estimated write-up of inventory to fair value is $7.2 million, and is
being amortized to cost of sales based on average inventory turns.
The Company anticipates the remainder of this write-up will be
amortized to cost of sales in the second quarter of fiscal 1997.
These charges, and the related provision for tax thereon, have been
excluded from the pro forma results as they are non-recurring.
6. Extraordinary Item
During the three months ended June 30, 1995 the Company repurchased
approximately $19.9 million principal amount at maturity of its 9 5/8%
<PAGE>
Senior Subordinated Notes due 2003. As a result of the repurchases
the Company recorded an extraordinary charge of $0.9 million for the
three months ended June 30, 1995 resulting from the write-off of
unamortized debt issuance costs and premium over accreted value. The
repurchase was partly funded by borrowings under the Company's old
credit agreement and partly from excess cash arising from the
Company's initial public offering in March 1995.
7. Subsequent Events
During July 1996 the Company sold 2,320,000 additional shares of
common stock at $28.625 per share through a public offering. The net
proceeds from the sale of shares of Common Stock by the Company, after
deducting expenses of the Offering, including discounts and
commissions paid to the Underwriters, were approximately $62.7
million. The Company used such net proceeds to repay indebtedness
which it incurred under the New Credit Agreement (see Note 4).
In May 1996 the Company announced that it had entered into a
definitive merger agreement which provides for the acquisition by the
Company of Neolens, Inc. ("Neolens"), a Florida corporation that
manufactures polycarbonate eyeglass lenses and has been a supplier to
the Company. In July 1996 the Company successfully completed a cash
tender offer for all outstanding shares of Neolens Common Stock,
Series A Preferred Stock and Series B Preferred Stock, pursuant to
which the Company purchased approximately 84% of the outstanding
Common Stock and 100% of the outstanding Series A and Series B
Preferred Stock. The Company currently expects to consummate the
merger in August 1996. The aggregate purchase price will be
approximately $16.0 million, including the assumption of Neolens debt.
The purchase price is being funded through borrowings under the
Company's New Credit Agreement during July and August 1996.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations
Overview
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated condensed financial statements and notes thereto included
elsewhere herein.
Results of Operations
Three months ended June 30, 1996 compared to three months ended June
30, 1995
The results of operations of the Company for the three months ended
June 30, 1996 reflect net income of $2.2 million as compared to net
income of $6.4 million for the same period in the prior year. On June
19, 1996 the Company acquired substantially all of the worldwide
ophthalmic business ("AO") of American Optical Corporation ("AOC")
pursuant to the terms of the Purchase Agreement (the "Purchase
Agreement") dated as of May 6, 1996 between the Company and AOC. The
Company acquired AO for cash consideration of $107.0 million (together
with the assumption of certain liabilities), subject to post-closing
adjustments (the "AO Acquisition"). The Company has consolidated the
results of operations of AO from the date of acquisition to June 30,
1996. The acquisition has been accounted for using the purchase
method of accounting. The purchase consideration paid for the assets
and liabilities of AO has been allocated based on preliminary
estimates of their fair values. The actual allocation of such
consideration may differ from that reflected after valuations and
other procedures have been completed. As a result of the acquisition
the Company has incurred two non-recurring charges in the quarter
ended June 30, 1996: (i) a $0.7 million charge to cost of sales for
the amortization associated with an inventory write-up to fair value;
and (ii) a $9.5 million charge for the write-off of in-process
research and development. The total estimated write-up of inventory
to fair value is $7.2 million, that is being amortized to cost of
sales based on average inventory turns. The Company anticipates the
remainder of this write-up to be amortized to cost of sales in the
second quarter of fiscal 1997. If these non-recurring charges and the
provision for taxes related thereto were excluded from the results of
operations, the net income for the quarter ended June 30, 1996 would
have been $8.9 million, an increase of $2.5 million, or 39% over the
net income for the quarter ended June 30, 1995 of $6.4 million.
Net Sales
Net sales totaled $109.5 million in the three months ended June 30,
1996, reflecting an increase of 14.2% over net sales of $95.9 million
for the same period in the prior year. Using constant exchange rates,
the percentage increase was 14.6%. The growth in net sales is
principally attributable to the growth in unit sales of higher priced
products, offset in part by price erosion in net sales of lower priced
products. Higher priced products accounted for approximately 59% of
net sales in the three months ended June 30, 1996 compared to
approximately 57% for the three months ended June 30, 1995. The
higher priced product growth was led by the growth in Spectralite and
plastic photochromic products. In addition, the inclusion of the AO
business for the last 10 days of June helped increase the sales
growth. Net sales increases by region, excluding the AO business,
were achieved as follows: North America 6.3%, Europe 4.6% and Rest of
World 31.7%.
Gross Profit and Gross Margin
Gross profit totaled $51.5 million for the three months ended June
30, 1996, reflecting an increase of 12.6% over gross profit of $45.7
million for the same period in the prior year. Gross profit as a
percentage of net sales declined from 47.7% for the three months ended
June 30, 1995 to 47.0% for the three months ended June 30, 1996.
Excluding the AO business, and the amortization of the non-recurring
inventory write-up to fair value associated with the acquisition, the
gross margin would have been 47.9%. The margin growth was principally
due to sales mix and manufacturing improvements.
<PAGE>
Operating Expenses
Operating expenses in the three months ended June 30, 1996 totaled
$45.4 million, an increase of $13.3 million, over operating expenses
of $32.1 million for the same period in the prior year. Included in
operating expenses is a non-recurring charge of $9.5 million for the
write-off of in-process research and development arising from the AO
Acquisition. If this charge were excluded from operating expenses the
growth over the quarter ended June 30, 1995 would be $3.8 million, or
12.0%. Operating expenses for the three months ended June 30, 1996,
excluding the non-recurring charge, as a percentage of net sales was
32.8%, compared to 33.4% for the same period of the prior year.
Research and development expenses for the three months ended June 30,
1996 increased $0.8 million to $4.2 million, compared to $3.4 million
for the three months ended June 30, 1995, which represent 3.8% and
3.5% of net sales, respectively. Selling and marketing expenses for
the three months ended June 30, 1996 increased $2.7 million to $19.3
million, compared to $16.6 million for the three months ended June 30,
1995 which represent 17.6% and 17.3%, of net sales for the three
months ended June 30, 1996 and the three months ended June 30, 1995,
respectively. As a percentage of net sales, general and
administrative expenses declined to 11.3% for the three months ended
June 30, 1996 compared to 12.6% for the three months ended June 30,
1995.
Operating Income
Operating income for the three months ended June 30, 1996 was $6.1
million. Exclusive of the non-recurring inventory amortization, and
the write-off of in-process research and development, operating income
for the three months ended June 30, 1996 totaled $16.3 million, an
increase of $2.6 million, or 19.3%, over the three months ended June
30, 1995 operating income of $13.7 million.
Net Interest Expense
Net interest expense totaled $3.3 million for the three months
ended June 30, 1996 compared to $3.1 million for the three months
ended June 30, 1995, an increase of $0.2 million. The increase of
$0.2 million is wholly attributable to increased borrowings, for the
last 10 days of June 1996, to fund the AO Acquisition. Simultaneous
with the AO Acquisition, the Company entered into a new bank credit
facility with The Bank of America National Trust and Savings
Association, for itself and as agent for a syndicate of other
financial institutions (see "_Liquidity and Capital Resources"). In
July 1996, the Company issued 2.32 million shares in a public offering
for which it received net proceeds of approximately $62.7 million.
The Company estimates that interest expense will increase by
approximately $3.7 million annually as a result of the AO Acquisition
offset by, the lower interest rate under the New Credit Agreement and
the reduction of debt from the proceeds of the equity public offering.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate
represents an effective tax rate projected for the full fiscal 1997
year of 31%. For the three months ended June 30, 1995 and the full
fiscal 1996 year, the company recorded an effective income tax rate of
28%. The Company provided valuation allowances against fiscal 1994
net operating loss carryforwards in the United States and against
fiscal 1995 and 1994 net operating losses in Australia, primarily as a
result of the acquisition of the Sola Group from Pilkington in fiscal
1994. The utilization of certain of these losses resulted in a
reduced effective tax rate for fiscal 1996. The Company expects the
remaining Australian net operating loss carryforwards to offset
taxable income in fiscal 1996, assuming that taxable profits are
realized in Australia. The Company has deferred tax assets on its
balance sheet as of June 30, 1996 amounting to approximately $17.6
million. The ultimate utilization of these deferred tax assets is
dependent on the Company's ability to generate taxable income in the
future.
Extraordinary Item
During the three months ended June 30, 1995 the Company repurchased
approximately $19.9 million principal amount at maturity of its 9 5/8%
<PAGE>
Senior Subordinated Notes due 2003. As a result of the repurchases
the Company recorded an extraordinary charge of $0.9 million for the
three months ended June 30, 1995 resulting from the write-off of
unamortized debt issuance costs and premium over accreted value. The
repurchase was partly funded by borrowings under the Company's old
credit agreement and partly from excess cash reserves arising from the
Company's initial public offering in March 1995.
Net Income
Net income for the three months ended June 30, 1996 totaled $2.2
million compared to $6.4 million for the three months ended June 30,
1995. If the non-recurring inventory and in-process research and
development charges, and the provision for taxes related thereto, were
excluded from the results of operations, the net income for the
quarter ended June 30, 1996 would have been $8.9 million, an increase
of $2.5 million, or 39% over the net income for the quarter ended June
30, 1995 of $6.4 million.
Liquidity and Capital Resources
Net cash used in operating activities for the three months ended
June 30, 1996 amounted to $2.0 million, a reduction of $6.1 million
from the funds provided by operating activities of $4.1 million for
the three months ended June 30, 1996. The most significant cause of
the reduction is the growth in accounts receivable and reduced growth
in trade payables, offset in part by an increase in operating income,
after adding back non-cash charges for in-process research and
development and amortization of inventory write-up, both arising from
the AO Acquisition.
During the three months ended June 30, 1996, inventories as a
percentage of net sales were 30.4% compared to 26.2% for the three
months ended June 30, 1995. Included in inventories at June 30, 1996
is an amount of $6.5 million arising from the write-up of inventories
to fair value associated with the AO Acquisition. If this amount is
excluded from inventories, inventories as a percentage of net sales
reduces to 29.0%. The ratios are not comparable as the net sales for
the three months ended June 30, 1996 only include 10 days net sales of
AO. Accounts receivable as a percentage of net sales for the three
months ended June 30, 1996 was 21.7% compared to 19.5% for the same
period a year ago. This ratio is similarly impacted by only 10 days
of AO business net sales included in the three months ended June 30,
1996.
Cash flows from investing activities in the three months ended June
30, 1996 amounted to an outflow of $107.1 million. On June 19, 1996,
the Company acquired substantially all of the worldwide ophthalmic
business ("AO") of American Optical Corporation ("AOC") pursuant to
the terms of the Purchase Agreement (the "Purchase Agreement") dated
May 6, 1996 between the Company and AOC. The Company acquired AO for
cash consideration of $107.0 million (together with the assumption of
certain liabilities), subject to post-closing adjustments (the "AO
Acquisition"). The AO Acquisition was funded primarily through
borrowings under the Company's New Credit Agreement, which borrowings
were subsequently repaid in part with the proceeds of the equity
public offering during July 1996 (see "_Subsequent Events").
Capital expenditures for the three months ended June 30, 1996 amounted
to $2.8 million, compared to $4.0 million in the comparable quarter in
the prior year. The shortfall is considered by management to be
timing related, and management anticipates capital expenditures of
$25.0 million to $30.0 million annually over the next several years,
of which approximately $4.0 million annually is viewed as
discretionary.
Net cash used in financing activities in the three months ended
June 30, 1996 amounted to $114.3 million. Simultaneous with the
closing of the AO Acquisition, the Company entered into a bank credit
agreement with The Bank of America National Trust and Savings
Association, for itself and as agent for a syndicate of other
financial institutions, covering an aggregate amount of $180 million
(the "New Credit Agreement"), replacing the Company's existing credit
agreement. The New Credit Agreement is divided into three tranches
which comprise: a five-year term loan of $30 million, a renewable
three-year foreign currency revolving facility of $30 million, and a
five-year US dollar revolver of $120 million. The term and revolving
loan were made in order to finance a portion of the AO Acquisition and
refinance existing facilities generally used for working capital. The
foreign currency revolver matures on May 31, 1999 and the term loan
and US dollar revolver both mature on May 31, 2001.
<PAGE>
Borrowings under the term loan facilities and the US dollar
revolver (other than swing line loans, which may only be Base Rate
Loans) may be made as Base Rate Loans or LIBO Rate Loans. Base Rate
Loans bear interest at rates per annum equal to the higher of (a)
0.50% per annum above the latest Federal Funds Rate, or (b) the Bank
of America Reference Rate. Base Rate Loans include a margin varying
from 0% to 0.125% based on the Company's Funded Debt to EBITDA Ratio.
LIBO Rate Loans bear interest at a rate per annum equal to the sum of
the LIBO Rate and a margin varying from 0.500% to 1.125% based on the
Company's Funded Debt to EBITDA Ratio. Borrowings under the foreign
currency revolver bear interest at rates per annum equal to the
referenced currency's local IBOR plus a margin varying from 0.500% to
1.125% based on the Company's Funded Debt to EBITDA Ratio. Local
currency Base Rate Loans are also available at similar spread to US
Base Rate Loans described above. The term loan and U.S. dollar
revolver currently bear interest at an initial rate of LIBOR plus
0.75% (approximately 6.5% as of June 30, 1996) and the foreign
currency revolver bears an initial interest rate of the relevant local
economy IBOR plus 0.75%.
During the three months ended June 30, 1995 the Company repurchased
approximately $19.9 million principal amount at maturity of its 9 5/8%
Senior Subordinated Notes due 2003. The repurchase was partly funded
by borrowings under the Bank Credit Agreement and partly from excess
cash reserves arising from the Company's initial public offering in
March 1995. The Company may from time to time purchase additional
Notes in the market or otherwise subject to market conditions.
On December 1, 1993, in connection with the acquisition of the Sola
business unit from Pilkington, the Company issued $116.6 million
principal amount at maturity of 9 5/8% Senior Subordinated Notes due
in 2003, from which it received gross proceeds of approximately $100.0
million and net proceeds of approximately $97.0 million, after
deducting fees and expenses. Cash interest on the Notes is payable at
the rate of 6% per annum of their principal amount at maturity through
and including December 15, 1998, and after such date is payable at the
rate of 9 5/8% per annum of their principal at maturity. Interest is
payable on June 15 and December 15 of each year. The Notes are
redeemable at the option of the Company, in whole or in part, at any
time on or after December 15, 1998, initially at 104.813% of their
principal amount at maturity, plus accrued interest, declining to 100%
of their principal amount at maturity, plus accrued interest, on or
after December 15, 2000. In addition, at the option of the Company at
any time prior to December 15, 1996, up to $40.75 million aggregate
principal amount at maturity of the Notes are redeemable from the
proceeds of one or more Public Equity Offerings following which there
is a Public market, at 109.625% of their Accreted Value, plus accrued
interest. The Indenture restricts the Company's ability to, among
other things, incur indebtedness, declare or pay dividends or make
certain other payments, create liens, utilize proceeds from an asset
sale, conduct transactions with affiliates and issue capital stock of
its subsidiaries.
The Company's foreign subsidiaries maintain local credit facilities
to provide credit for overdraft, working capital and some fixed asset
investment purposes. As of June 30, 1996 the Company's total credit
available under such facilities was approximately $32.0 million, of
which $25.5 million had been utilized.
The Company continues to have significant liquidity requirements.
In addition to working capital needs and capital expenditures, the
Company has substantial cash requirements for debt service. The
Company expects that the New Credit Agreement and other overseas
credit facilities, together with cash on hand and internally generated
funds, if available as anticipated, and the net proceeds from the
public offering in July 1996 (see "_Subsequent Events") will provide
sufficient capital resources to finance the Company's operations, fund
anticipated capital expenditures, and meet interest requirements on
its debt, including the Notes, for the foreseeable future. As the
Company's debt (including debt under the New Credit Agreement and the
Notes) matures, the Company may need to refinance such debt. There
can be no assurance that such debt can be refinanced on terms
acceptable to the Company.
<PAGE>
Seasonality
The Company's business is somewhat seasonal, with third quarter
results generally weaker than the other three quarters as a result of
lower sales during the holiday season, and fourth quarter results
generally the strongest.
Inflation
Inflation continues to affect the cost of the goods and services
used by the Company. The competitive environment in many markets
limits the Company's ability to recover higher costs through increased
selling prices, and the Company is subject to price erosion in many of
its commodity product lines. The Company seeks to mitigate the
adverse effects of inflation through cost containment and productivity
and manufacturing process improvements. Approximately 7.0% of the
Company's net sales during the three months ended June 30, 1996 were
derived from its operations in South America, with the majority of
such net sales generated in Brazil, which has experienced periods of
hyper-inflation. In June 1994, the Brazilian Government introduced a
new currency, the Real, and adopted certain financial plans to reduce
inflation in that country. Through June 30, 1996, these plans have
been successful, and inflation has reduced to approximately 2-3% per
month, compared to a rate of approximately 45% per month in June 1994
(3,500% for the full year). Since introduction of this plan, the
Brazilian Real has either strengthened or remained at parity with the
US dollar. During the latter part of fiscal 1996 and during the first
quarter of fiscal 1997, the Venezuelan Bolivar has significantly
deteriorated against the US dollar. The Company is monitoring the
continued deterioration of this currency and has provided against
current earnings during this quarter for the decline in the Bolivar.
If the decline continues the Company expects that it will adopt hyper-
inflationary accounting concepts of SFAS 52 for translation of Bolivar
denominated results. At present approximately 1% of the Company's net
sales originate in Venezuela.
Subsequent Events
Common Stock Offering
During July 1996 the Company sold 2,320,000 additional shares of
common stock at $28.625 per share through a public offering. The net
proceeds from the sale of shares of Common Stock by the Company, after
deducting expenses of the Offering, including discounts and
commissions paid to the Underwriters, were approximately $62.7
million. The Company used such net proceeds to repay indebtedness
which it incurred under the New Credit Agreement.
Neolens Acquisition
In May 1996 the Company announced that it had entered into a
definitive merger agreement which provides for the acquisition by the
Company of Neolens, Inc. ("Neolens"), a Florida corporation that
manufactures polycarbonate eyeglass lenses and has been a supplier to
the Company. In July 1996 the Company successfully completed a cash
tender offer for all outstanding shares of Neolens Common Stock,
Series A Preferred Stock and Series B Preferred Stock, pursuant to
which the Company purchased approximately 84% of the outstanding
Common Stock and 100% of the outstanding Series A and Series B
Preferred Stock. The Company currently expects to consummate the
merger in August 1996. The aggregate purchase price will be
approximately $16.0 million, including the assumption of Neolens debt.
The purchase price is being funded through borrowings under the
Company's New Credit Agreement during July and August 1996.
Information Relating to Forward-Looking Statements
This quarterly report includes forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934,
including statements regarding among other items, (i) the Company's
interest expense, (ii) the impact of inflation, and (iii) future
income tax rates and capital expenditures. These forward-looking
statements reflect the Company's current views with respect to future
<PAGE>
events and financial performance. The words "believe", "expect",
"anticipate" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise. Actual results could differ materially
from the forward-looking statements as a result of "Factors Affecting
Future Operating Results" included in Exhibit 99.1 of the Company's
Form 10-K for the fiscal year ended March 31, 1996, and the factors
described in "Business-Environmental Matters", also included in the
Company's Form 10-K for the fiscal year ended March 31, 1996.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Page Number or
Exhibit Number Description Incorporation by Reference
to
<S> <S> <C> <S>
2 Purchase agreement between Sola Filed as Exhibit 2 to the
International Inc. and American Form 8-K of the Company,
Optical Corporation, dated as of dated May 6, 1996 and
May 6, 1996 incorporated herein by
reference
4 Multicurrency Credit Agreement, Filed as Exhibit 4 to the
dated as of June 14, 1996, among Form 8-K/A (Amendment No.
Sola International Inc., and the 2) of the Company, dated
Other Borrowers as the Borrowers, May 6, 1996 and
the Subsidiary Guarantors, Bank of incorporated herein by
America National Trust and Savings reference
Association, as Agent and Letter of
Credit Issuing Bank, The First
National Bank of Boston and The
Bank of Nova Scotia, as Co-Agents,
and the Other Financial
Institutions Party Thereto.
11 Statement Regarding Computation of
Per Share Earnings 20
(b) Reports on Form 8-K
The Company filed reports on Form 8-K, Form 8-K/A (Amendment
No. 1) and Form 8-K/A (Amendment No. 2), in each case dated
as of May 6, 1996, to report the purchase agreement between
Sola International Inc. and American Optical Corporation.
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Sola International Inc.
(Registrant)
Dated: August 9, 1996 By: /s/Ian S. Gillies
----------------------
Ian S. Gillies
Vice President
- Finance, Chief
Financial Officer,
Secretary and Treasurer
<PAGE>
Exhibit Index
Exhibit No. Description Page
11 Statement Regarding
Computation of Per Share
Earnings 20
<PAGE>
Exhibit 11
SOLA INTERNATIONAL INC.
Computation of Earnings Per Share
(in thousands, except per share data)
(unaudited)
Three Months Ended
June 30, June 30,
1996 1995
Income before extraordinary item $2,162 $7,355
Extraordinary item, loss due to repurchase of
senior subordinated notes, net of tax - (912)
------- -------
Net income $2,162 $6,443
------- -------
Weighted average number of common and common
equivalent shares outstanding 21,802 21,780
Add assumed dilution arising from exercise of
common equivalent shares (stock options) 1,357 1,086
------- -------
Weighted average number of common and common
equivalent shares used in earnings (loss) per
share calculation 23,159 22,866
------- -------
Earnings (loss) per share:
Income before extraordinary item $0.09 $0.32
Extraordinary item _ (0.04)
------- -------
Net income (loss) $0.09 $0.28
------- -------
<PAGE>
